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EUR/JPY At Risk Of Correction As Italy’s Banking Crisis Looms

EUR/JPY At Risk Of Correction As Italy’s Banking Crisis Looms

The Japanese yen has so far managed to hold on its gains, offset by the surprise Trump victory in early November. The quickly shifting landscape saw the markets recover strongly from a risk off sentiment to a rally fueled by inflation expectations and the Fed rate hike.

So far, while the election promises of president elect Trump have yet to materialize, the Fed has delivered a 25 basis point rate hike a week ago and signaled three rate hikes for 2017. The markets initially weakened on the news, with many news reports citing that the Fed’s forecast was more hawkish than expected. However, as the days unfolded, the yen continued to weaken across the board, in what has been one of the strongest momentum led rallies seen this year.

If the yen maintains these gains into the year end, it would mark a wild ride for the currency pair, which until the early part of this year, sparked speculation of the Bank of Japan intervention in the currency markets to stem the declines. At one point, the yen did seem threatening to break down to the lower 90’s.

The euro for its part has also weakened significantly. ECB president, Mario Draghi did a splendid job earlier in December. Despite tapering the QE’s bond purchases, Draghi managed to send the euro lower. The monetary policy pergence between the Fed and the ECB is one of the driving factors behind the price action in EUR/USD which was seen trading in a range for the most part this year.

Heading into a rather thin trading week, we can’t expect much from the markets. However, EUR/JPY is starting to look a bit weaker in what could be some initial signs of weakness to this uptrend. On a fundamental basis, the euro could once again enter the familiar turf of the European banking crisis.

The issue of bad loans with Monte dei Paschi di Siena is one that has been widely expected and covered. So this week when the world’s oldest bank abandoned plans for private investor rescue, it turned to the Italian government, which previously passed a funding of 20 billion euro towards rescuing the banking sector.

While the matter may remain subdued for now, the balance of risks are quite fragile as a potential spill over into other weak banks in the region could spark another early banking crisis in the eurozone.

EUR/JPY: Technically speaking!

The 25 pip renko chart on EUR/JPY shows a steady uptrend which sent prices towards 123.75 before posting a modest pullback. The question is whether this will be another dip in the rally or if it marks the start of a new downtrend. Only price will tell.

EUR/JPY 15 Minute Chart

For now, there are a few signs of a potential correction that could trigger a short term downtrend.

Firstly, the rising wedge pattern was breached as price broke down before pulling back to retest the breakout near 123.00 – 122.75. A continuation here is required for early confirmation of a move to the downside. However, the declines are likely to be supported near the 121.00 region which previously saw a strong reversal.

If this initial support gives way, further declines could be expected as EUR/JPY could potentially test the main support at 116.00 which is long pending. Validating this bearish view is the pergence on the Stochastics which is failing to confirm the highs in prices. However, there could be another attempt to push to the upside back towards 123.00 – 122.75 region.

As long as the resistance at 123.00 – 122.75 caps the gains, EUR/JPY can be seen pushing lower, initially towards 121.00 followed by a retest to the lower support at 116.00.

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